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ENVIRONMENT WORKING GROUP, MAY 25TH 2012, JW MARRIOTT, LOS ANGELES
THE ENVIRONMENT A NEW FRONTIER FOR ACTUARIES
Climate Change, Carbon & Environmental Challenges
Fred Rowley
(on behalf of co-authors Tony Coleman and Elayne Grace)
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Agenda Environment – new challenges for actuaries Climate change & insurance Other climate / carbon related risks and
opportunities Examples of actuarial involvement in Australia Investors’ perspectives Broader environmental issues Final thoughts
A new challenge to the actuarial profession Environmental issues include climate change, resource depletion, scarcity or
sharply increasing costs of commodities such as oil, food or medicines
Environmental factors increase uncertainty and may entail discontinuities rather than incremental adjustments in some of the assumptions that we derive from past experience
These changes are likely to be pervasive and affect actuaries working in all areas be it life or non-life insurance, investment or funds management, pensions and social security, health or Enterprise Risk Management.
We need to understand, analyse and draw consequences to adapt our methodologies and assumptions in order to provide high quality advice
As a profession, our role is to help decision makers and our society to become aware of the need for changes and contribute to the optimisation of public policy options
IPCC – Climate Change Update Intergovernmental Panel on
Climate Change - 1500 Authors,1000 reviewers
“Warming of the climate system is unequivocal, as is now evident
from observations of increases in global average air and ocean
temperatures, widespread melting of snow and ice and rising global
average sea level ”
Actuarial contributions include impact analysis of extreme weather
events on business and local economies – an Australian actuary
was a contributing author in the 2007 IPCC report
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Tipping elements in the climate system
Source: Lenton et al. (2008) PNAS 105(6): 1786-1793
Climate Change: Multiple challenges and opportunities
Supply Chain
Advocacy
Staff engagement
Reputation
Customers Product design
New product opportunities
Research & pricing
Threat to our existing way of life
Claims Management
Asset Management
Capital & reinsurance
Climate change
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Worldwide weather-related disasters 1950–2010
2011 Update
Weather and climate core business for insurance
$m
Source: Insurance council of Australia and PWC facts and figures.
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Impact on losses in individual insurance
Source: ”Globe of Natural Hazards”, Munich Re, 2009
Australian climate modeling
Severe Australian Tropical Cyclones are expected to become more intense & move farther south
Sydney April ‘99 hailstorm (hail size 9cm+) that cost $1.7bn could become twice as frequent
Source: Insurance Australia Group
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Australian adaptation: Building codes can help
Recommendation: further enhance building standards to
cost effectively protect the property itself and its owner’s
financial interest
0%
5%
10%
15%
20%
25%
30%
35%
40%
Mis
sion
Bea
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rish
Japo
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Mou
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Bab
inda
Kur
ram
ine
Bea
ch
% o
f sum
insu
red
dam
age
pre 1980 post 1980
Cyclone Larry post-event analysis: building codes make some difference
Source IAG
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National Disaster Insurance Review -Availability and affordability of insurance
Recommendations Govt agency created to manage national
coordination of flood risk management and to operate a system of premium discounts and a flood risk reinsurance facility
All home insurance policies include flood cover
A system of premium discounts be introduced in order that most purchasers of policies in areas subject to flood risk be eligible for discounts against the full cost of flood insurance.
Govt guarantee claim payments Gold Coast, Qld © Google Maps 2008
Mortality and morbidity will be impacted
Elderly, poor and rural populations are expected to be most affected
Colder winters and hotter summers especially put the older population at risk
In developing countries. impacts of climate change are likely to include reduced water quality and availability, and elevated rates of vector-borne diseases such as malaria, dengue fever
Impact on Health and Life Insurance
Diseases, injuries and deaths are also set to increase due to more frequent natural disasters
Impact will ultimately be determined by how societies react, adapt and care for those most exposed to its effects
Other Involvement by Australian Actuaries • Actuaries in Australia have also been active in:
– Input to public policy consultations – Risk management in long-term contract pricing – Forestry schemes - offsets and pooling/insurance – Sustainable investments
• Insurance industry bodies in Australia are active in: – Advice to government on local planning and
infrastructure measures, insurability and insurance information needs
Investments – Strong support for action
2011 Global Investor Statement on Climate Change supported by 285 investors representing US$20 trillion assets Major long-term risk to global economy and assets in which we invest Well designed and effectively implemented long-term policy will not only
present significant opportunities for investors but will also yield substantial economic benefits
Private investment can and must play a critical role however it will only
flow at the scale and pace necessary if it is supported by appropriate policy frameworks that shift the balance in favour of low-carbon investment opportunities.
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Carbon bubble - stranded assets ?
50 yr 2ºC global carbon budget - 886 Gt CO2
Already used 1/3rd in 10 yrs - which leaves 565 Gt CO2 (2010 - 2050)
But proven global carbon reserves (Co's and Govt) are five times that size - 2,795 Gt CO2
This means only 20% can be used leaving 80% of assets technically unburnable and therefore stranded
Top listed companies represent around 25% of these reserves so what happens to their value if only 20% of their assets can be used
Source www.carbontracker.org.
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From risk comes opportunity
Expanding actuarial roles
Strategic advice
Policy advice
Product design
Risk assessment
Biodiversity banking
Cleantech investment analysis
New risks / product opportunities arising from the need to reduce carbon emissions
Green buildings
Renewable energy
Hydrogen
Carbon offset/trading
Co-generation (off-grid in cities)
Hybrid & Electric cars
Adaptation projects
An example - Low Carbon Australia (LCA)
• Provides financial solutions and advice on energy efficiency projects so as to deliver cost-effective carbon emission reductions
• Operates government backed accreditation for carbon neutral products and organisations
• Funded by Australian government A$100 million (=US$106 million)
• One actuary on LCA Board and another actuary employed full–time in project analysis role (total staff of 29)
Commercial retrofit energy waste reduction
Petroleum and gas maintenance
Pasture and grassland management
Residential appliances and electronics Commercial retrofit HVAC
100 50 150 0 200 250
Active livestock feeding
Gas CCS new build Solar PV (centralised)
Chemicals processes and fuel shift
Anti-methanogenic treatments
Wind offshore
Other industry energy efficiency
Commercial new builds
Lowest cost opportunities to reduce emissions by 249 Mt CO2e1
Commercial retrofit lighting
Residential lighting
Reforestation of marginal land with timber plantation
Mining VAM oxidation
Cement clinker substitution by slag
Coal to gas shift (increased gas utilisation)
Residential new builds
Mining energy efficiency
Diesel car and light commercial efficiency improvement
Aluminium energy efficiency
Reforestation of marginal land with environmental forest
Commercial elevators and appliances
Petrol car and light commercial efficiency improvement Reduced cropland soil emissions
Commercial retrofit insulation
Cogeneration
Operational improvements to existing coal plant thermal efficiency
Reduced T&D losses
Cropland carbon sequestration
Degraded farmland restoration
Coal CCS new build with EOR Capital improvements to existing
gas plant thermal efficiency
Solar thermal
Biomass/biogas
Biomass co-firing
Onshore wind (marginal locations)
Improved forest management Geothermal
Coal to gas shift (gas new build) Onshore wind (best locations)
Strategic reforestation of non-marginal land with environmental forest
SOURCE: ClimateWorks team analysis
Reduced deforestation and regrowth clearing
Commercial retrofit water heating
Operational improvements to existing gas plant thermal efficiency
Coal CCS new build
Costs & Opportunities - 2020 GHG emissions reduction cost curve
Emissions reduction potential MtCO2e per year
Industry Power
Transport Buildings Forestry Agriculture
Cost to society A$/tCO2e
-50
-250
-200
-150
-100
50
200
150
100
0
SOURCE: ClimateWorks team analysis, derived from 2020 GHG emissions reduction cost curve
GHG reduction, MtCO2e Percent of total opportunity
Average cost, A$/tCO2e
Key cost curve metrics
Net savings Moderate cost Higher cost
29% 71 Mt -$77 36% 89 Mt $21 35% 88 Mt $61
Industry Power
Transport Buildings Forestry Agriculture
100 50 150 0 200 250
Emissions reduction potential MtCO2e per year
Cost to society A$/tCO2e
100
0
50
-150
-200
-50
150
-100
Market opportunities Product positioning Point of differentiation Downstream customer loyalty
Corporate Advantage Corporate reputation and positioning Staff attraction and retention Business capital in terms of understanding carbon risk Independent third party recognition of action taken
Cost Reductions Reducing exposure to future energy and carbon costs Reducing resource use and emissions
Reasons why companies pursue carbon neutrality
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World Ecological Footprint – humanity today needs 1.5 planets to survive
Source GFN Ecological Footprint Atlas 2010
Projected Growth
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Earth treated as business in liquidation Millennium ecosystem assessment report (UN)
reviewed current status of global ecosystem services and how past and future changes may affect human wellbeing
Findings
2/3rds of world’s ecosystems (that we rely on for food, air and water) are either degraded or being used unsustainably
Policy development required to ensure that the environment is used sustainably. Expertise required in science, economics, sociology and engineering
Earth's balance sheet has to be strong and healthy
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The answer - Sustainable Development
“Sustainability is improving the quality of human life while living within the carrying capacity of supporting eco-systems”
Source: (1991). "Caring for the Earth:A Strategy for Sustainable Living.” Gland, Switzerland. "
“Sustainable development is development that meets the needs of the present without compromising the ability of future generation to meet their own needs”"
Source:“United Nations (UN) Brundtland Commission 1987”
-1000-500
01900
20002010
2050
0
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10World population
Yr
Billio
n
Asia Key Facts 60% of world population and
fastest growing region 70% freshwater withdrawals for
irrigation Food demand 40%↑ by 2050 25% of worlds GDP, consumes
50% of worlds raw materials Asian Development Bank 2011
Peak Oil
Climate Change
Water
Food Financial sustainability
Global limits linked - all symptoms
of unsustainable world
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In summary
Climate Change and sustainability are urgent challenges that need to be addressed on a multi-disciplinary basis
Actuaries well equipped to deal with risks, uncertainties and long term effects and can assist in quantifying policy options and optimising responses … but there is a lot of work to be done
Actuaries can contribute to mitigation and adaptation, and to the formation of public policy
Actuaries can take a leadership role in addressing these issues
– What part will you play in the solution?
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“The subprime risk was something we should have known about, but we ignored it. We know about the risk of climate change. The risk from
climate change is substantially larger than the subprime risk. Continuing to ignore it will bring us a crisis much greater than we are dealing with
now.”
Mindy Lubber, president of Ceres, a US-based coalition of institutional investors
“The financial crisis is surely a very powerful lesson that the longer you ignore risk, the more difficult the consequences. People had a cavalier
attitude to risk in general for the last 10 years. Let’s hope they start taking all aspects of risk a little bit more seriously – and particularly the
risks of postponing action [on emissions].”
Lord Nicholas Stern, Former World Bank Chief Economist
Source: Financial Times, The heat is on by Fiona Harvey 2008
Parting Thoughts
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Thank you
For more information from Australian actuaries working in this area:
Elayne Grace Fred Rowley
[email protected] [email protected]
Tony Coleman